WEAKNESSES

Slow progress in terms of governance (particularly control of corruption)

RISK ASSESSMENT

Easing of monetary policy to boost growth

Slowed by the burden of the high cost of credit and the drought, growth should continue to improve in 2018. The return of more normal weather conditions should enable agricultural production, and of coffee in particular, to continue improving. The improved performance of the agriculture sector should also help boost the household consumption of those dependent on the health of that sector. With the Central Bank’s (BoU) key lending rate cut from 17% in January 2016 to 9.5% in December 2017, this should boost the use of credit in the private sector, while also helping to boost growth in household consumption. Services (almost 50% of GDP), starting with retail trade, are expected to feel the benefits of this vitality. The increasingly favourable credit conditions will help boost private investment, attracted in particular by prospects for the exploitation of oil and gas reserves (production expected as of 2020). The secondary sector should see rapid growth thanks to the uplift as a result of public investment as part of the second National Development Plan. There will likely be projects for the construction of the oil and gas industry infrastructures, as part of public-private partnerships, in addition to those of recent years covering transport and energy (hydroelectricity). Under the pressure of capital goods import demand, the contribution of exports to growth will however remain negative, despite improved coffee exports. The growth outlook, positive overall, could suffer in the event of any worsening in the country’s political and/or security context.

The inflation forecasts are for stabilisation around the BoU target rate (5%), after the price pressure under the impact of the drought on food prices eased.

Budget execution undermining public accounts

The budget deficit in 2016/17, under the impact of lower domestic receipts and the slow rate of execution of the infrastructures projects, was reduced. Similarly to the problems encountered during the preceding fiscal year, the extension of the tax base is unlikely to make much progress in 2017/18. The deficit is thus expected to increase, reflecting the increase in spending on capital investment in the context of developing infrastructures and the oil and gas sector. Progress in the delivery of these projects is however subject to constant delays, leading to budget overspends. The recurrence of this scenario cannot be ruled out, at the same time as the increase in current expenditure might not be enough for the allocation of the resources necessary for the planned investments. These issues have tended to be behind some of the delays, and even cancellations, of the concessionary external financing on which a large proportion of the investment spending is dependent. In addition, the increasing use of domestic borrowing to finance the deficit has resulted in an increase in interest rates, which is in danger of generating a crowding-out effect on the private sector. With this large scale utilisation of borrowing, the debt has increased rapidly and could, at the current rate, undermine its sustainability.

The current account balance will likely worsen in 2018, dragged down by the balance of goods. The increase in exports, and of coffee in particular, is expected to be slower than that of capital goods. The import bill could also be swollen by the increasing firmness of oil prices in 2018. Transport services will continue to be a burden on the balance of services, while the repatriation of profits will be a further drag on the income balance. Remittances from expatriate workers will once again be the leading positive contribution to the current account balance. The size of investment inflows, mainly from China and India, should help to finance the deficit.

Deterioration in the internal political climate, unstable external environment

Yoweri Museveni (72), in office since 1986, was re-elected in the general elections in 2016, after his party (National Resistance Movement, NRM) won a majority. In October 2017, a draft amendment to the constitution to remove the age limit for presidential candidates (75 years old), and which would therefore allow Mr. Museveni to stand in the 2021 elections, triggered violent demonstrations. These mounting tensions have also brought attention to the issue of his succession, which remains unresolved. They are also feeding into the rising tide of discontent surrounding the level of corruption and the lack of progress in improving standards of living. Alongside these sources of political instability, there is also ongoing fragile security situation in Uganda’s border regions. The instability in South Sudan and the Democratic Republic of the Congo is a particular source of concern. As the leading supplier of troops to the AU mission in Somalia (AMISOM), the country remains a potential target for Islamist terrorism – specifically, El Shebab, which continues to plague Kenya.

These areas of instability have a negative impact on assessments of the operational environment, despite a business climate that is relatively favourable compared to those of its Sub-Saharan African peers. Without any significant progress in 2017, the country has nevertheless dropped seven places in the Doing Business 2018 rankings (122nd out of 190).